ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Unsystematic risk, or company-specific risk, is a risk associated with a particular investment. Unsystematic risk can be mitigated through diversification, and so is also known as diversifiable risk. Once diversified, investors are still subject to market-wide systematic risk.

Detailed explanation-2: -Diversification reduces asset-specific risk – that is, the risk of owning too much of one stock (such as Amazon) or stocks in general, relative to other investments. However, it doesn’t eliminate market risk, which is the risk of owning that type of asset at all.

Detailed explanation-3: -Diversification helps mitigate the risk to you about such scenarios by choosing different investments and types of investments. Diversification doesn’t guarantee investment returns or eliminate risk of loss including in a declining market.

Detailed explanation-4: -The only way to eliminate unsystematic risk is to not invest. It’s difficult to foresee when a company might experience an adverse event and then anticipate what the market’s reaction will be to it. So no, investors cannot eliminate unsystematic risk. But investors can manage it through diversification.